Monthly Archives: June 2014

Presenting a strong offer

iStock_000019216251Small-250.jpgIt’s disappointing, frustrating and sometimes, discouraging when you lose a home you want to buy.

One of the hardest lessons for today’s buyers is that writing an offer doesn’t mean that you’ll get the home or even a counter-offer.   The low inventory affecting many of the housing markets requires a different strategy to give you the best chance to get the home you want.

  1. Make your best offer initially; you may not get a chance to accept a counter.
  2. Submit a written pre-approval letter from the lender.
  3. Increase earnest money above what is considered normal.
  4. Make a larger down payment.
  5. Eliminate unnecessary contingencies.
  6. Don’t ask for personal property not included in the listing agreement.
  7. Pay your own customary closing costs.
  8. Shorten the inspection period.
  9. Buy the home “as is” subject to inspections which still allows you to get your earnest money back if the inspections are unacceptable but doesn’t require the seller to make repairs.
  10. Write the seller a hand-written, personal letter telling them why you want their home; include a picture of your family.
  11. Offer to use the seller’s or listing agent’s preferred title company.
  12. If you can pay cash, do so and arrange financing after closing.   Be prepared to show proof of available funds.
  13. Schedule the closing as soon as possible but let the seller know you can be flexible.
  14. Once you decide on a home, act with expedience.
  15. Ask your real estate professional if they have any other suggestions.

Think of making an offer like applying for a job.  You want to make your best impression and show why you are the best choice.   You won’t always know that there are multiple offers.   Approach the process like the competition is doing their best to get the home.

Rules for real estate investments

rules3.pngThe profit potential in single family homes for investment has been a consistently good long-term investment. They offer investors the opportunity of high loan-to-value mortgages at fixed interest rates for 30 years on appreciating assets, tax advantages and reasonable control that other investments don’t offer.

Last year, Warren Buffett said that if he had a way of buying a couple hundred thousand single-family homes, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.

Individual investors actually have an advantage over the institutional investor but if they are not familiar with rental real estate, some basic rules could be very helpful.

1. Invest now to get more in the future.     Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for something more at a later date.

2. Real estate is an IDEAL investment.     IDEAL is an acronym that stands for income, depreciation, equity build-up, appreciation and leverage.

3. Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range.     This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.

4. Location, location, location.     The same homes in different areas will not behave the same. You can improve the condition, modify the terms or adjust the price but the location can’t be changed.

5. Understand your strategy – buy and sell, buy and hold or buy, rent and hold.     These three distinct strategies involve big differences in acquisition, management and taxation.

6. Know where your profit is coming from before you invest.     The four contributors to profit are cash flow, appreciation, amortization and tax savings. They don’t contribute equally or the same in all investments.

7. Profit starts with purchase.     Buying the property below market value builds profit into the investment initially.

8. Risk is directly proportionate to the reward involved.     An investment that has a high degree of upside also will have considerable downside possible.

9. Avoid functional obsolescence unless you have a plan before you buy.     The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.

10. Good property + good tenant + good management = great investment. These are three solid components for a successful investment.

11. Problems left unresolved have a tendency to get worse.     It is generally cheaper in time or money to fix a problem earlier rather than later.

If you’d like more information about the opportunities in our market, contact me.

Mortgage insurance information

iStock_000023022788Small-250.jpgIn a study released by TD Bank, 65% of buyers with mortgages that required mortgage insurance said the higher monthly payment was more than they originally expected.

Private mortgage insurance is required on loans that exceed 80% of the home’s value.   For conventional loans, the premiums range from 0.5% to 1% annually.   The PMI could add close to $100.00 a month to the payments on a $200,000 mortgage and over $200.00 a month on a FHA mortgage.

FHA has two components to its mortgage insurance which includes an up-front charge on closing of the loan and an annual charge.   The up-front premium is 1.75% of the mortgage which can be paid in cash at closing or added to the mortgage amount.   The annual premium ranges from 0.45% to 1.35% depending on the loan-to-value and term of the mortgage.

Most lenders are required to automatically cancel coverage when a 78% loan-to-value is reached which on a 30 year loan with normal amortization could be eight to eleven years depending on original loan amount and interest rate.   If the value of the home has increased as documented by an appraisal so that the current mortgage is below 80% loan-to-value, the lender can be petitioned to eliminate the PMI.

Beginning in April, 2013, FHA requires the mortgage insurance to be paid for the entire term of the mortgage.   Prior to this rule change, it was required to remain in effect for a minimum of five years but could be cancelled when the mortgage is reduced to 78% of the original purchase price.

A homeowner can greatly reduce their cost of housing by avoiding mortgage with a minimum 20% down payment.   If a higher loan-to-value mortgage is required to purchase the home, the objective should be to pay down the mortgage amount to relieve the need for the mortgage insurance.   Generally, loans with lower loan-to-value mortgages also have lower interest rates.

Home improvements

Register-250.jpgThere is a significant difference in how the money you spend on your home is treated for income tax purposes.   Repairs to maintain your home’s condition are not deductible unlike rental property owners who can deduct repairs as an operating expense.

On the other hand, capital improvements to a home will increase the basis and affect the gain when you sell which may save taxes.

Additions to a home or other improvements that have a useful life of more than one year may be considered an increase to basis or cost of the home.   Other increases to basis may include special assessments for local improvements like sidewalks or streets and amounts spent after a casualty loss to restore damage that was not covered by insurance.

Unlike repairs, improvements add to the value of a home, prolong its useful life or adapt it to new uses.

You can read more about improvements and see examples beginning on the bottom of page 8 of IRS Publication 523.   For a form to keep track of money you spend, print this Improvement Register.

Supply and demand

iStock_000030508968Small-250.jpgIt is generally considered a seller’s market when the conditions favor the seller.   This condition exists when demand is high and supply is low without any significant adverse economic conditions taking place.

Demand is determined by ready, willing and able buyers.   Low interest rates with indications that they will begin to rise fuels part of this demand.  Rising prices also creates a sense of urgency to avoid higher housing costs.

Inventory is currently below what is considered balanced in most areas.  In some areas and price ranges, homes are selling very quickly, with multiple offers and sometimes at above the listing price.   When too many buyers are chasing too few properties, things get competitive and the seller is the beneficiary.

Even when buyers and sellers come to an agreement on price and terms, a challenge can occur if the appraisal doesn’t meet the sales price.   Either the purchaser has to come up with the additional cash or the purchase price has to be renegotiated.

A typical seller wants the most money possible for their home in the shortest time frame with the fewest inconveniences.   A Seller’s Market provides the most likely environment for this to happen.

Keep your home safe during your summer vacation

iStock_000019660747Small 250.jpgPlanning a summer trip is usually focused on what you’ll do, see and experience.  Enjoy it even more by spending a little time before you leave to make sure your home is safe while you’re gone.

Consider these suggestions along with your other normal efforts:

  • Tell your neighbors you’ll be out of town and to be aware of any unusual activity.
  • Notify your alarm company    .
  • Discontinue your postal delivery.
  • Use timers on interior lights to make it appear you’re home as usual.
  • Don’t make it easy for burglars by leaving messages on voice mail or posting on social networks.
  • Post on social networks about your vacation after you’ve returned.
  • Remove the hidden spare keys and give one to a trusted neighbor or friend.
  • Lock everything, double-check and set the alarm.
  • Take pictures of your belongings in case you need them.
  • Disconnect TVs and other equipment in case of unexpected power surges.
  • Adjust your thermostat.
  • Arrange for lawn care.
  • Consider disconnecting the garage door opener.
  • Put irreplaceable valuables in a safety deposit box.

It’s nice to go out of town on a well-deserved trip and it’s always nice to get back home…especially when it is just the way you left it.

Using IRA funds for your down payment

IRA 250.jpgMost taxpayers know that they will pay a 10% penalty if they withdraw funds from their IRA before they turn 59.5 years old.   There is an exception for first-time home buyers that allows a penalty-free withdrawal of up to $10,000 per person if they haven’t owned a home in the previous two years.

This would allow a married couple who each have an IRA to withdraw a lifetime maximum of $10,000 each, penalty-free for a home purchase.

In many cases, the money would be used for a down payment or closing costs.   However, some buyers might consider this source to increase their down payment so they could qualify for a loan without mortgage insurance.

If the taxpayer qualifies for the penalty-free withdrawal, there may still be taxes due.   Contributions to traditional IRAs are made with before-tax dollars and the tax is paid when the funds are withdrawn.   Since Roth IRAs are made with after-tax dollars, there is no tax due when the funds are withdrawn.

Another interesting fact about this provision is that the taxpayer making the withdrawal can help a qualified relative which includes children, grandchildren, parents and grandparents.

Homebuyers who are considering using IRA funds for a home purchase should get expert advice from their tax professional concerning their individual situation.